Category Archives: Post

By: James D. Wall, Esq.

In July, President Biden issued an executive order at least signaling his administration’s disdain for covenants not to compete for physicians (often referred to as “non-competes”). The Executive Order (EO) encourages the Federal Trade Commission to ban or limit non-competes, including in health care. While the EO did not ban non-competes in the health care setting, it is perhaps instructive about the stance the administration may take in the future.

Are Covenants Not to Compete Enforceable Against Physicians?

In some states, covenants not to compete are unenforceable for physicians. In North Carolina, courts continue to enforce covenants not to compete involving physicians, even when doing so forces hundreds of patients to find a replacement physician. Valid covenants must be narrowly tailored to protect the “legitimate business interest” of the employer.

What is a Covenant Not to Compete?

A non-compete restricts a physician from participating in certain job-related activities in a geographic region for a specific period of time, which often extends post-termination of employment.

Issues Regarding Enforceability

While courts in North Carolina enforce non-competes, there are certain restrictions. First, a covenant not to compete must be in writing. Thus, while an agreement of employment can be oral, a covenant not to compete must be in writing.

Second, the covenant must be supported by adequate consideration. Our courts have held that an offer of employment is deemed adequate consideration to support a covenant. Interestingly, our courts have held that mere continued employment is not adequate consideration to support a covenant. For example, if a physician has worked for an employer for several years, and the employer decides that it wants all of its providers to sign covenants not to compete, the employer must provide the employed physician consideration (e.g., a raise or bonus) to support the covenant. If the employer simply says, “sign this or you will be fired” and the physician signs, the covenant would be attacked for lacking supporting consideration. That is, the physician’s continued employment is not adequate consideration to support the covenant.

Third, the restrictions contained in the covenant must be “reasonable” to protect the “legitimate business interest” of the employer. Reasonableness, like beauty, is in the eyes of the beholder, or in this case, the trial judge. Arguments regarding reasonableness usually gravitate to the three restrictions: activity prohibited, geographic scope, and temporal scope. The stakes are high; if any provision is deemed unreasonable by a North Carolina court, the judge is authorized to strike the unreasonable provision, but not re-write it.

Activity Prohibited

Generally, the activity prohibited should be the activity that the physician performs for the employer. Thus, to prohibit a physician from “working for another medical practice” might be too broad, since this would ostensibly prohibit the physician from, say, mopping floors. The “practice of medicine” is tighter, and, the “practice of cardiology” even narrower.

Temporal Restriction

Generally, most of the covenants we draft or review are between six (6) months and twenty-four (24) months post-termination. Again, if a covenant restricts a physician for three years post-termination, and a court finds that only two years is necessary, the court will strike the three year provision, and not rewrite the covenant to two years.

Geographic Restriction

This is often the hardest to evaluate, especially concerning employers that have multiple offices and with physicians who perform some administrative functions for all offices, or who float from office to office providing professional services. A practice probably has a good idea, by the zip codes of its patients, on the territory from which it draws most of its patients. If the restriction goes beyond that territory, it could be struck as unenforceable.

Public Policy Exception

Finally, even if a covenant passes the first three tests (in writing, supported by consideration, and reasonable), it can still be struck as being against public policy. If the court determines that if the covenant were enforced, the public would be deprived of a much-needed service. This is often an argument posited in cases involving sub-specialists.

What’s Next

While the EO has not really changed things in North Carolina, it is instructive that President Biden’s administration is concerned with competition in health care. President Biden has attempted to require vaccines for those working for health care facilities that receive Medicare dollars. It does not stretch the imagination that the administration could similarly direct CMS to prohibit restrictive covenants for those who receive Medicare dollars.

By: James D. Wall, Esq.

Not really. In North Carolina, medical practices, with few exceptions, must be owned by physicians. The exceptions include joint ownership between physicians and advanced practice providers (APPs), ophthalmologists and optometrists, and psychiatrists and psychologists. However, a medical practice cannot be owned by a private equity firm.

The Corporate Practice of Medicine Doctrine

North Carolina has long prohibited the corporate practice of medicine. That is, corporations owned by lay people cannot deliver professional medical services. However, the legal framework for this prohibition is an amalgam of statute, regulations, a 1955 Attorney General Opinion, and “Position Statements” issued by the North Carolina Medical Board that do not carry the force of statute or regulation but rather are intended to guide physicians in the ethical discharge of their duties. Our State’s corporate practice of medicine doctrine can be summarized by three tenets.

First, individual physicians or APPs must be the ones delivering professional services. This makes sense. Someone who is not licensed to deliver care cannot deliver care. A plumber is not licensed to wire your house. But, can that professional be employed by, or under contract with, a corporation owned by laypeople? The answer in North Carolina is “no.”

Second, there can be no lay ownership of a professional corporation or professional limited liability company. This is codified in our statutes. As a corollary, corporations owned by lay people cannot deliver medical care.

Third, physicians cannot split fees with non-licensed providers. This is somewhat grounded in our anti-referral statute but is specifically prohibited by a Position Statement of the North Carolina Medical Board. Referrals Fees and Fee Splitting, Position Statement of North Carolina Medical Board, adopted 1993, amended 2013. Thus, if a lay corporation employed a physician and charged and collected for that physician’s services, such an arrangement would be deemed unauthorized “fee splitting” since the lay corporation would be keeping some of the physician’s fee for service.

Corporate Practice Doctrine Exceptions

North Carolina’s corporate practice prohibition is riddled with exceptions that nearly swallow the rule. Non-profit hospitals can employ and collect money from services rendered by physicians. This exception seems to be extended to any hospital even if for-profit. Licensed HMOs are also exempt. The stated purpose for the exemptions for non-profits is that they, unlike their for-profit brethren, are bound (by their charters if nothing else) to put the interests of the patients over the interests of shareholder return.

Working With the Corporate Practice Doctrine

What is a physician to do if approached by a private equity (PE) firm? There may be a potential viable transaction, but not in the traditional sense. That is, PE cannot raise money, pay for a physician’s practice, run it for several years, and then flip it.

The MSO Model

There are many instances in our state where PE has entered the health care space without violating the corporate practice of medicine doctrine. What I have described below is not a DIY guide, but a general outline of how PE can participate in health care and physicians can sell a portion of their practice.

First, the investors form a management services organization (MSO) to acquire non-clinical assets of a medical practice. MSOs promote efficiency by providing non-clinical support needed to deliver care through a medical practice model. It is not unusual for an MSO to handle human resources issues, preparation of accounting statements, revenue cycle management, accounts payable management, and billing and collections. The “pitch” is that the MSO does everything within a medical practice except practice medicine, and leaves to doctors what doctors do best, i.e., treat patients.

Second, the MSO enters into a management services agreement (MSA) to be the exclusive provider of managerial services to the practice. The devil is in the details here. There are some provisions of MSAs the Medical Board believes constructively turn over control of the medical practice to the MSO. For example, the medical practice should retain ownership and control of all medical charts, should retain the right to employ and discipline all providers, and should control all aspects of the delivery of care.

Third, the MSA requires the medical practice to pay the MSO a fee for the delivery of management services. This fee cannot be a percentage of revenues or profits; such a fee would be deemed unethical “fee splitting.” The fee, with few exceptions, should be “flat,” and not in any way be based on the volume or value of referrals. The fee can be renegotiated as the practice grows because the work performed by the MSO would grow as well. The fee must be “fair market value” for the services rendered by the MSO.

Takeaways

This type of transaction is fraught with traps. Additionally, it has been my experience that the Medical Board looks to its licensees, not to the MSOs, to get this right. Don’t try this at home.